Global Transformation And Common Platforms Will Improve Efficiency

Key Takeaways

• Simplification and tech integration drive efficiency, enhance cost performance, and support revenue and net margin growth.
  
• Geographic and business diversification stabilizes earnings and revenue, aiding resilience against varying macroeconomic environments.
  
• Currency depreciation and regulatory changes could negatively impact Santander's revenue and net margins, with economic and geopolitical challenges further affecting credit quality and earnings.

Catalysts

Provides various financial products and services to individuals, small and medium-sized enterprises, large corporations, and public entities worldwide.

• Banco Santander's global transformation initiatives, including ONE Transformation, are driving operational leverage by simplifying and integrating processes, which are expected to improve efficiency and support revenue growth. This impacts both net margins and earnings positively.
  
• The bank's emphasis on leveraging its proprietary global tech capabilities and common platforms is anticipated to further enhance efficiency and cost performance, potentially leading to higher net margins.
  
• Santander's strategic focus on expanding its U.S. franchise and leveraging advisory and client relationships in Corporate & Investment Banking (CIB) aims to boost revenue through increased cross-border business and higher fee income.
  
• Growth in the company's Retail and Consumer segments through global platforms such as Openbank is projected to improve net interest income by lowering funding costs and enhancing customer experience.
  
• The continued geographic and business diversification across Santander's operations mitigates risk and ensures consistent revenue streams, contributing to stable or improving earnings despite varied macroeconomic environments.

Banco Santander Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Banco Santander's revenue will grow by 8.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 23.5% today to 20.6% in 3 years time.
• Analysts expect earnings to reach €13.4 billion (and earnings per share of €1.01) by about May 2028, up from €12.0 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €14.8 billion in earnings, and the most bearish expecting €10.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.5x on those 2028 earnings, up from 7.7x today. This future PE is greater than the current PE for the GB Banks industry at 8.1x.
• Analysts expect the number of shares outstanding to decline by 3.68% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.46%, as per the Simply Wall St company report.

Banco Santander Future Earnings Per Share Growth

Risks

• The depreciation of some currencies across Santander's footprint, such as the Brazilian real and the Mexican peso, could negatively impact revenue when reported in euros due to foreign exchange losses.
  
• Regulatory changes, such as the Spanish banking tax and potential changes in insurance regulations in Germany, may impact net margins and increase volatility in earnings.
  
• The economic environment in Brazil remains challenging, with higher inflation and interest rates potentially impacting loan growth and increasing loan loss provisions, thus affecting net margins.
  
• Continued geopolitical uncertainties and their potential impact on the labor market could affect credit quality, leading to increased loan loss provisions and impacting earnings.
  
• Santander's exposure to interest rate changes may impact net interest income, with sensitivity in regions like Spain and Brazil that could face pressure from fluctuating rates, affecting overall profitability.

Valuation

• The analysts have a consensus price target of €6.702 for Banco Santander based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €7.5, and the most bearish reporting a price target of just €4.7.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €65.1 billion, earnings will come to €13.4 billion, and it would be trading on a PE ratio of 8.5x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of €6.18, the analyst price target of €6.7 is 7.8% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.